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Afford Anything | Make Smart Money Choices
Morgan Housel: How to Trend-Proof Your Portfolio and Think Beyond Fads [GREATEST HITS WEEK]
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- [00:00]
A
Merry Christmas Eve eve. Today is December 23rd, the eve of Christmas Eve. We are kicking off Greatest Hits week, a five day series in which we are sharing five episodes across five days, all of which we produced at the beginning of 2024. It's our way of looking back over the year and highlighting some of the best episodes that you may have missed. Today's episode is a conversation with Morgan Houselike. It originally aired on Valentine's Day of this past year. It's all about making big decisions, trusting your gut instincts, and insulating your portfolio from fads and trends, which is an even more relevant conversation now than it was a short 10 months ago. So enjoy the first of five days of greatest Hits week. Have you ever made a flippant, seemingly minor decision that radically changed the course of your life? Morgan Housel has experienced this. At age 17, he made a snap judgment that ended up saving his life. And sadly, two of his friends were less fortunate. He's going to share that story in today's episode. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice carries a trade off and that applies not just to your money, but but to any limited resource that you need to manage, like your time, your focus, your energy. So what matters most and how do you make decisions accordingly? Those are the questions that this show is dedicated to exploring. My name is Paula Pant. I am the host of the podcast and today's guest. Morgan Housel was named by MarketWatch as one of the 50 most influential people in the market, which is shocking to me that they think that there are 49 other peers within his cohort because it is hard to imagine anyone who is consistently as original in his thinking when it comes to his analysis of investments, of the markets of risk as Morgan Housel. He is the New York Times best selling author of the Psychology of Money and his latest book is called Same as Ever, which explores concepts that remain constant, consistent and universal, starting with the notion that humans are not rational. Here he is, Morgan Housel. Hi Morgan.
- [02:25]
B
Paula, it's so good to be back. Thanks for having me.
- [02:26]
A
Oh, thank you so much for being on the Show, Morgan. In February 2001, you made a decision that seemed like a nothing decision at the time, but it accidentally saved your life. Tell us about that.
- [02:41]
B
So I grew up skiing as a competitive ski racer in, in Lake Tahoe, California. That was my whole childhood in my teenage years. And we'd ski six days a week, ten months a year all over the world. There were about 12 of us on the Squaw Valley ski team. And it was great. It was such a cool childhood, such a cool teenage years. It was really fun. Lots of independence, lots of, obviously, just living outside. It was amazing. And one of the things that we did on a not too irregular basis was we would ski out of bounds, which is you duck under the ropes that say do not cross, and you're skiing out of bounds. And then when you do that, there's no chairlift at the bottom. We would ski until it would spit us out on this backcountry road, and then we would hitchhike back to the mountain. And us rebellious teenagers, we were 17 years old at the time. We loved it. Like, it was. It was this cool rebellion that we loved. And when you're out of bounds, the skiing is untracked, and it's great. That's where all the best skiing is. So one day in February 2001, my two best friends, Brendan Allen and Brian Richmond, we were skiing out of bounds on the backside of Squaw Valley, and we skied down, and it was great. Everything's awesome. And then Brendan, Brian wanted to do it again. Like, as we're hitchhiking back, they said, hey, let's go do it again. And for whatever reason, I did not want to. I think when I look back, the hitchhiking kind of freaked me out. I always thought we were, like, about to be abducted kind of thing, which was maybe true. So I didn't want to do it. So I said, hey, guys, why don't you go do it again? And rather than hitchhiking, I will drive my truck around to the base of the mountain and pick you up. They said, great, that's our plan. Let's go do it. And we went our separate ways. They went skiing, and I went back to take my boots off and get in the truck and go pick them up. When I drove around to pick them up, they were not there. And I didn't think that much of it. We didn't have cell phones back then, and people were comfortable being out of communication. I didn't really think anything of it. But the hours went on, and nobody had seen them. And eventually Brian's mom called me and said, hey, Brian never showed up for work today. Do you know where he is? And I told her the truth. And we, you know, we were skiing on the backside. I don't think they ever showed up. And we. We started piecing this all together. We eventually. As the hours went on, we eventually got search and rescue involved. And when search and rescue went to the spot where I told them we were skiing out of bounds. They said when they got there it looked like half the mountain had been torn away in what was the. Clearly the fresh scars of a massive, massive avalanche that had just occurred. And avalanches, obviously most people don't have that much experience with them. They can be the equivalent of tsunamis with just so much energy, so much power, they can snap giant oak trees like twigs. They can just be so incredibly powerful. And it was clear that a massive avalanche had just occurred. Search and rescue spend about nine hours on the hill in the middle of the night with these giant floodlights and a team of search dogs trying to figure out what happened here. The search dogs eventually homed in on a spot in this fresh avalanche scarred field where the rescuers eventually found Brennan and Brian buried under six feet of snow, dead. Of course, Paul, I'm sure you and everyone listening has lost somebody that was dear to them. So that experience was not unique to me in, in that sense, like everyone has lost, It's a, it's a terrible part of life that you lose people who are dear to you. I think what was, and I, I didn't piece this together until many years later, but if I had gone on that second run with them, I, I 100% chance I would have be dead that, that, that I would have died with them. The avalanche just took out the entire, it just took out a football field worth of, of area. And so when I look back, the decision to not go with them was like the most brainless decision I've ever made. I didn't think about the consequences, I didn't weigh the, the pros and cons. I didn't do a risk analysis. It was just a mindless, dumb decision. You guys go do it, I'm going to go do something else. And it is without a doubt the most important decision that I've ever made in my entire life. And I think that is also a universal trait for people too, where the most important or sometimes the worst decision that you ever made was just this dumb, brainless, mindless decision. Maybe for some people you left for work at 7:53 in the morning, but if you had left at 7:52, you would have been in a deadly car accident or, or vice versa. Like we go out of our way to try to make big decisions in our life, to steer our life in the right direction. And actually when I think, when you look back in hindsight, so much of life hangs by a thread where the most important thing you Ever did is actually just this brainless, dumb, mindless decision that you never thought twice about.
- [07:10]
A
Given that that is the reality, given that sometimes the most important decisions are the. The ones that you don't think twice about, how do we then proceed with decision making? You know, knowing that the butterfly effect often stems from the most inconsequential of choices or seemingly inconsequential of choices?
- [07:30]
B
I think, Paula, the reason I included this is the first chapter of the book, same as Ever, is because I really wanted to drive home what the thesis of this book is, which is stop pretending that. That we can predict what's going to happen in the future, particularly the things that are going to change, because we can't. The world hangs by a thread. So stop pretending that we can predict the next recession, the next bear market, who's going to win the next election. When you realize how fragile the future is and how fragile the past is, then you stop pretending that you can predict these things. And therefore, I think what we should spend our focus and our attention on are the things that never change. The behaviors that have been the same for a thousand years. It will be the same for the next thousand years. Things that we know are definitely going to be part of our future, regardless of all the crazy accidents that are going to occur between now and then. I think that's the best that we can do. So in one sense, it's a plea for humility about our ability to predict both your own life and kind of the macro world. And it's also just a plea for the next step in that acknowledgment is focusing on the behaviors and the trends of humanity that never, ever change.
- [08:38]
A
What are some of those, those universals, the behaviors and the trends, two, that.
- [08:44]
B
Really stick out, you know, from the book that were maybe the most meaningful for me, one is this idea that risk is what you don't see, which is actually a very connected point to what we just discussed, which is that in all of history, people go out of their way to try to predict the biggest risks in front of them. In modern times, we have economists and portfolio managers and financial advisors who are, you know, market strategists who are looking and saying, this is what we think the stock market's going to do over the next 12 months. This is. This is what we think the economy is going to do over the next 12 months or five years. And the collective track record of that is as awful as you can possibly imagine. Like, nobody has the ability to do that. And the reason why is because risk is what you don't see. So think of the biggest risks we have faced in modern times. If you had to make a list of the biggest risks, I think it would be Pearl Harbor, 9, 11 and Covid. Those are the three things that move the needle in society by the most. And the common denominator of all three is that nobody particularly lay people reading the newspapers or writing the newspapers saw those things coming. They were impossible to predict until the very moment that they happened. And those are extreme examples. But I think every single year in hindsight, the biggest risk to society is something that nobody was talking about one year prior. It's always been like that. And that can be kind of disappointing, disheartening, kind of scary to acknowledge that. But I actually think it's just, it's kind of a relief actually to be like, okay, let's therefore spend our time focusing on some of the behaviors that never change. One other of those behaviors that I'll talk about that was one of my favorites from the book, is this idea that the best story wins. Not the right answer, not the best answer, not the accurate answer. In almost every endeavor in life, the best story wins. The people who catch your attention and are willing to follow you and gain your wallet, share whatever it might be, are just the people who tell the most compelling story. It's not the people who have the right answer. It's people who tell the most compelling stories. And there are so many examples of this throughout all of history, of people who were factually wrong or doing things wrong, but they were so good at telling their stories that they got everyone's attention. It's true for businesses, it's true for products, it's true for pundits, it's true for authors. I profile several authors in the story of authors who have written books that explained zero new information. They're covering topics that are as well trotted as anything that's ever been written about before. But they sold tens of millions of books because they told a very good story about what they were doing. And that is, I think, analogous for a lot of what everyday ordinary people can be. You don't need to create a new product or discover something new to change the world or to build a good business. There is so much low hanging fruit of taking facts and products that other people have already discovered or invented and just telling a better story around them. I mean, I think in one sense Steve Jobs was this a non insignificant part of the technology in the iPhone. Not only did he not exist, but kind of already existed in other products. Palm Pilots and HP was making smartphones before the Apple, but they were just kind of ugly garbage and they didn't work very well. And Steve Jobs, like his genius, was taking some of that technology and making it beautiful. And even like the ipod marketing campaign, he could have called it digital MP3 music device. Instead, the slogan was a thousand songs in your pocket, which is like such a good story that you'll remember. So those are two from the book that really stick out for me. The book is 23 of those kind of stories about things that never change.
- [12:14]
A
That second one, that importance of stories, is closely related to what I thought you were going to say, how I thought you would answer this question, which is that humans are irrational. To quote Jeff Bezos, when the anecdotes and the data are in conflict with one another, often the anecdotes are actually the winner.
- [12:35]
B
I love that quote from Jeff Bezos because A, I think it's so true and B, if anybody else but Jeff Bezos said that you would, you would say that's clearly wrong. But I think he's, he's, he's obviously right. You know, it is true that people are not rational. Everybody. I am not rational. You are not rational. Nobody is rational. We want to pretend like we are all like collecting data about how the world works and just basing our decision based off of that, but we're not. Everyone is not only emotional and hormonal, but they are swayed by the experiences of what they have experienced firsthand in life. And what I have experienced is very different from what you've experienced and vice versa and true for everybody. We shouldn't pretend that we are all just a bunch of spreadsheet machines making sense of the world. Everyone is viewing the world through their own lens, through the lens of their own incentives, through the lens of all these kind of like social aspirations and different time horizons, different risk tolerances, that completely changes how people are going to behave in the world. And I think a lot of what happens in the world when you see people doing things that you disagree with, like different investing behavior that you think, why could people possibly be buying these crypto coins? Or in geopolitics, how could people possibly believe X, Y and Z about that candidate or take these actions in that war, whatever it would be, and nine times out of ten, the, the answer to that is they've experienced something that you have not. And therefore they have different goals and priorities and skills and viewpoints that you don't. And I think it's really Important for a lot of things in life that whenever you see somebody doing something you disagree with, a good question to always ask yourself is what have you experienced that I have not? And if I had experienced the same thing as you, would I be partaking in the same behavior that I disagree with? And a lot of times the answer is yes. The answer is yes. If you see people who are doing, you know, there's a great quote from my, my brother in law who's a social worker and he works with a lot of very disadvantaged kids, kids from broken homes and abusive homes. And he told me one day, he said all behavior makes sense with enough information from his experience. If there is a child who is, has really bad behavior at school, maybe they're violent at school, with enough information about what that kid is going through at home, if even has a home, then that behavior starts to make sense. I think that's an extreme example of all of us, that the behavior that I have as an investor, as a writer, as a parent, as a spouse is based off of the information like the experiences that I've had in life. We all want to pretend that we are thinking rationally and independently about the world, but I think we are all just mirrors of what we've happened to experience in life.
- [15:16]
A
Right. And with that, the information that you talk about, that sounds to me like the basis of empathy.
- [15:22]
B
Yes. At like 100%. And I could just say yes and we can move on to the next topic because that's totally true. If there is an asterisk to it, it's that nothing is more persuasive than what you've experienced firsthand. And it is, I don't think you can have full empathy for other people's experience. I think you can maybe in the best scenario get 90% of the way to what they've experienced. But if you are somebody who, it finds military history fascinating, but you, as, as I have not served in combat yourself, then there is no amount of reading in a book about what it was like to, you know, storm the beaches of Normandy in 1944. No amount of reading is going to actually convince you what it's like. You're never going to understand what it's actually like to be there. And, and since nothing is more persuasive than what you've experienced, everyone kind of goes through the world thinking that their view of the world is the right one. The view of the world that is based off of their own experiences, that that's the right view. And everyone else who has a Different view is either misinformed or evil or whatever it might be.
- [16:26]
A
Right, right. And that, that then becomes interesting when it comes to persuasion. Because, you know, as you point out, people often don't want accuracy, they want certainty. And so often the strongest voices with the best stories who are able to communicate what they have experienced better than the rest, those are the voices that often stand out, even, you know, even if they aren't necessarily accurate. In fact, how is accuracy measured given that, Given that each person's truth is so dependent on their own experience?
- [17:02]
B
Well, look, if you wanted a financial advisor or an economist who was doing things right, who is actually going to give you the best information, you would want someone who would say something along the lines of, there is a 54% chance of a recession in the next year. That's like the smart wise response. I'm making that number up. But so like talking in probabilities, but what actually gets people's attention is the guy who goes on TV and pounds his fist on the table and says, we are going in a recession. 100% chance it's going to be a disaster. No avoiding it. That's what people want to watch. Because what that person does, no matter what they're saying, when they say it with certainty, is they are reducing the uncomfortable uncertainty that you have in your head. Having uncertainty about the future is very uncomfortable to deal with. And we have this urge to extinguish it. And the only way to extinguish it, even if it's a false sense of calm, is to pay attention to people who are promoting certainty. So that's always who gets people's attention. And in the real world, how people gauge your accuracy is black and white. Were you right or wrong? You said X was going to happen. Did it happen or did it not? That's tends to hey how we judge people, but the right way that you actually want to do it is based off of probability. So the best example of this was the 2016 election when Nate Silver, who is a famous statistician who does a lot of work in presidential elections, the day before the election, I think he said, I might be getting this a little bit wrong, but I think he said there is an 80% chance that Hillary Clinton's going to win and a 20% chance that Donald Trump is going to win. Now, obviously Donald Trump won and a lot of people the next day said Nate Silver was wrong. And Nate Silver was like, no, no, no, I, I gave a one in five chance that Donald Trump would win like you would not play Russian roulette with a 1 in 5 chance, you would know there was a good chance that that might occur. And so the only way to gauge someone like Nate Silver's accuracy is to look at how he's done over 10 election cycles. And if he says this candidate is going to win 80% of the time over 10 election cycles, if he's right 80% of the time, then you can say he was accurate. But that's just not how like everyone wants to view it as binary. Were you right or were you wrong? And that's like that flaw in how people think about numbers in the world and statistics in the world has always been with us and always will because the core of it is we're just trying to reduce uncertainty. People don't want to hear that this candidate has a 20% chance of winning. They want to hear someone who says this candidate that you like is going to win. That's who's going to get your attention.
- [19:32]
A
You talk about Nate Silver, you know the best way to evaluate his predictions is by looking over a very long time duration. But the challenge is that often we're dealing with data sets that are a little bit too limited, too short in duration. You give the example in your book about a 75 year old economist who started his career at 25, has really only had a 50 year career that's actually not that long.
- [19:58]
B
And the biggest thing about that is during those 50 year careers, like actually a pretty long career in career terms, that economist has only lived through maybe four or five recessions, something like that, not that many. I mean, if you were a meteorologist and there were only five thunderstorms during your career, we would have no idea how thunderstorms work. The only reason that we have a good sense of something like meteorology is because there's 10,000 thunderstorms a day to study. But things like presidential elections and recessions and bear markets, we just don't have that much information. I mean, in the United States, good economic data, like quality apples to apples data has really existed since the mid-1940s, not that long ago. Many people listening to this, either them or their parents were alive during that period. That's all we have information on. During that period. There have been I think seven recessions or something like that, not that many. Whereas if you really wanted to really understand how economies work and understand the worst case scenario, the best case scenario, the boundaries of what you might experience, you would want 10,000 years of apples to apples data on how this works. But we don't have that, and we'll never have that. To say nothing of the economy really evolves over time. So even if we had 10,000 years of data, let's not pretend that the economy even 100 years ago is is analogous to the economy today. So there's just a lot that we don't know, particularly things like the worst case scenario, the best case scenario, we're looking back at data sets that are very, very limited.
- [21:36]
A
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- [22:47]
B
How high is the interest rate for the new Laurel Road High Yield Savings account?
- [22:53]
A
This high?
- [22:56]
B
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- [23:17]
A
This episode is brought to you by Google Gemini. With the Gemini app you can talk live and have a real time conversation with an AI assistant. It's great for all kinds of things.
- [23:26]
B
Like if you want to practice for.
- [23:27]
A
An upcoming interview, ask for advice on things to do in a new city or brainstorm creative ideas. And by the way, this script was.
- [23:34]
B
Actually read by Gemini.
- [23:35]
A
Download the Gemini app for iOS and Android today. Must be 18 plus to use Gemini Live. You mentioned the 1940s. Even when we have a data set, oftentimes our perception of that data set is different from reality. And so I bring up the 1940s because it reminds me of A different data set that. That data set of the 1950s. And people often perceive that the economy in the 1950s was wonderful. But actually, I want to, for the audience, read a couple of stats that you included. The homeownership rate in the 1950s was 12 percentage points lower than it is today, meaning more people today own homes than they did back in 1950. The average home was one third smaller than today's. Food consumed 29% of an average household's budget in 1950, as opposed to 13% today. Workplace deaths were three times higher than today. Why then, given this set of numbers, do we have this perception that the economy of the 1950s was better times?
- [24:47]
B
I think there's two reasons, like for this nostalgia idea that the 1950s were this golden age of prosperity. One is that by comparison of the 20 years that preceded it, the Great Depression in the 30s and the and World War II in the 40s, by relative to that, the 50s, even if there is a little bit of prosperity, just felt like this absolute bonanza party because it was coming off of such low expectations. The other thing that I think was really important is the 50s were this very unique period in Western history because for a brief period of time, there was very little wealth inequality, at least relative to what existed before or since. The 50s and early 60s were this period where the distribution of incomes got very flat. A lot of that was just like an echo from World War II of how companies were managed. And the top marginal tax rate was 91% in the 50s. So it's just an era where you didn't have billionaire hedge fund managers and athletes making $50 million a year and CEOs making $100 million. That just didn't exist back then. And that, for better or worse, I'm not saying that, you know, that was preferable, but for better or worse, what it did is it had a really big impact on people's mindsets because there's no such thing as an objective measure of wealth. Everything is just relative to those around you. So whenever you are gauging how well you're doing financially, you just say, what do I have compared to that person? Compared to your neighbor or your coworker or your siblings? Everything's relative to those around you. And in the 50s, because there was very little wealth inequality, most people looked at those around them and said, relative to that person, I'm doing pretty well. I'm doing at least as well as them. There are not that many people who I see in my town who are doing dramatically better. Than I am. And I think what has happened in the 80 years since then is our incomes have. Have doubled in real terms and our houses have gotten bigger and our life expectancies have gotten longer. And like, go on down the list of things that have improved, but our expectations have grown by even more because now there is a subset of society who we can look at, who are. No matter how well you're doing, even if you are a brain surgeon living in Beverly Hills, you are surrounded by people who are doing so much better than you. Then to make matters worse, now with social media, you have like, the fake view of how well people are doing because everyone's just posting the curated highlight reel of their life that makes themselves look happier and prettier and richer than they probably actually are. And then. So now your ability to feel glum about how well you're doing, even if statistically you're doing very well by comparison to others, which is really all that matters, is very easy to feel like you're falling behind. There's this great quote from Montesquieu that he said 300 years ago, he said, if you only wish to be happy, that is actually very easy to do. But people want to be happier than other people. And that is very difficult because we overestimate how happy those other people are. So that was true 300 years ago, and I think it's as true as ever as it is today.
- [27:43]
A
How then do we moderate our expectations given that tendency?
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B
One is, I think at the broader level, at the macro level, the society level, you can't. It's always going to be like that. Everyone is always going to measure themselves relative to other people. I think there's an evolutionary backing to this of, like, it doesn't matter how many resources you have, if you want to get the best mate, you need to have more resources than the other person. That's how you do it. Like, it's. Everything's relative to the competition, so it's. It's never going to be extinguished at the broad level, I think at the individual level, if there is a way to do it, and it's much easier said than done. It's just the realization that nobody is thinking about you as much as you are. Everyone else is worried about their own stuff. They're worried about their own car, their own house, their own clothes, their own jewelry. And so once you come to terms with that, that nobody is actually paying that much attention to how big your house is or how beautiful your car is or what brand shoes you're wearing. Most people are not paying attention to that. They're worried about themselves. Once you come to terms with that, then I think part of your social aspirations to like put up your peacock feathers and show off to strangers really diminishes. You're not going to walk around in a burlap sack, but like your willingness, your desire to show off really diminishes once you recognize the G that's being played, which is people trying to show off for other people who are not even paying attention to them to begin with.
- [29:09]
A
One of the ideas you discuss is that when bad things happen, they can happen immediately, whereas when good things happen, those things compound very slowly. We can certainly see that at the macro level. Can you discuss how that applies at the, at the level of an individual life?
- [29:27]
B
Yeah. So I mean, in general, bad news happens or can happen very quickly, can happen in one instant. We mentioned Pearl Harbor, 911 and Covid. All three of those events happened more or less instantly. Pearl harbor and 9 11, literally, they happened in, in one fell swoop. And Covid more or less hit people overnight. But good news is, tends to be the opposite. It tends to be a slow compounding that takes place over years or decades, that when you look back over your lifetime or your career or over many generations, something that is good and improves by 2% per year, if you can do that for 50 years, you completely transform society in your own life. But since in any given year it was just a 2% improvement, you, you never notice it. It's never exciting enough to pay that much attention to, even if that is like the major driver of your own life is a slow compounding of good news. So I think in people's careers it tends to happen where you look back after a 20 year career. And for a lot of people, not everyone, of course, but a lot of people will be like, wow, I'm making way more money than when I started my career. I am so much smarter, I have so many more skills, I have so many more connections than I did relative to 20 years ago. But you never really appreciate it as much as you should because let's say every year you got a 5% raise and your skills improved by 5% and your connections improved by 5% in any given year. It was never enough to pay that much attention to. But when you look back, it can be extraordinary. And you contrast that with bad news in your career, which might be being laid off, being fired, doing something catastrophic in your career, that can happen instantly, when the good news tends to happen very slowly because of this, whether it's at the society level or the individual level, I think most people are a little bit more pessimistic on what has happened in the world than they should be, because the bad news is front and center, like shoved in your face every single day because it happened today. Whereas the good news tends to be ignored because it's never exciting enough to pay attention to in any given time period, even if over time it's so much more powerful than all the bad news that you paid attention to.
- [31:35]
A
And so that tendency to pessimism or to overweighting that, that negativity bias, what are some ways that we can actively counteract that?
- [31:44]
B
I think too, at the society level, this is one of those things that, same as ever, it'll never be like that. We're always going to pay more attention to the bad news than the good news. I think if you have a really stark appreciation for the power of compounding, then it is automatically going to push you towards the things that keep happening every single year, even if those things are tiny. And you realize that if in a given year you have a recession and a bear market and a pandemic and all those things are really bad, but you have this faith that companies are going to be able to increase their productivity by 2% per year, whatever the number might be, and they can do that for the next 50 years, that you're going to be an investor that's extraordinary. And that is going to be so much more powerful than the bear market that took place in any given year. That has a shelf life. Like, it's not fun and it kind of sucked going through it, but it has a shelf life. Whereas the compounding that's going to keep going for years or decades is going to be the most powerful force that you ever exist. So I think at, you know, again, at the broad level, we can't. There's not. There's not much we can do about this. At the individual level, it's like a. A really firm appreciation, if not like love for the power of compounding.
- [32:53]
A
And you talk about the bear market that, you know, it'll suck for a while, but you'll get through it. The risk that investors need to be aware of is that risk of ruin. How do we, as individual investors, how do we know where that line is? What's going to be so bad that it will knock us out of the game?
- [33:08]
B
I think at some level, it's impossible to have a portfolio that is completely exempt from ruin, no matter what it is. You could be 100% in gold, 100% in real estate with no mortgages. It doesn't matter what it is. Look at what's happened. And look what happened to most of Europe in the 1940s. It didn't matter what your portfolio was. Countries that were bombed to rubble and huge segments of society who were wiped out. So at some point there is no completely foolproof, ruin proof portfolio, but I think just a stronger appreciation for how bad things can get. And everyone wants to look back at history as something like the Great Depression and be like, oh, that was terrible, but it could never happen to me. Or hyperinflation in Argentina. That's terrible, but it could never happen to me. I think a big part of finance is realizing that other people's bad circumstances, of course they could happen to you because they happen to other people who are not any less worthy than you are. And so I think understanding that is to me at least gives you a much lower tolerance for things like debt, a much higher tolerance for cash and an appreciation. As we talked earlier about risk is what you don't see. Of course I, right now sitting in my chair today, do not foresee a second Great Depression. I don't foresee hyperinflation in America. I don't foresee a civil war. Go on down the list. Of course, I do not foresee those things today. But if you go Back to the 1920s in America, people did not foresee a depression back then. No, no one, no one was seeing it back then, but it happened. So the idea that risk is what you don't see is part of, is a big part of this. And if you look at my personal asset allocation, like how my wife and I invest our money, a lot of financial advisors would look at it and say, you're being too conservative, you have too much cash, we have zero debt. What are you, what are you preparing for? And my answer would always be, I, I, I don't know. I don't know what I'm preparing for. I'm preparing for a world that I know curveballs are the most common balls that tend to be thrown. So I have no idea what it's going to be. If you're only preparing for the risks that you can envision, you're always going to miss a surprise. And so I think that's the only way to give yourself a fighting chance at surviving these risks that you can't envision yet.
- [35:17]
A
That's right. Nobody predicted the Great Depression. Right. You go back to news articles prior to the Great Depression, nobody was talking about the imminent economic risk to come. Uh, were we, you know, in the past, Were we blinded by delusion, or in the present, are we fooled by hindsight?
- [35:36]
B
Oh, I think it's. I think it's a little bit of. Of both. So Robert Shiller, he's a Yale economist, won the Nobel Prize. He has worked with economic historians, and he's basically said, like, look, show me one person who predicted the Great Depression. And he says, look, you can come up with people who said the economy is extended and it's. It's due for some sort of decline, But a depression of 25% unemployment, that's going to last. Nobody predicted that. Nobody predicted that. So the question is, were we blinded by delusion then or are we blinded by hindsight now? Because in hindsight, it seems as plainly apparent as anyone could have seen. Like, who could have not seen this coming, given the excesses of the 1920s? And I think it's. I think it's. It has to be both. I think in the 1920s, of course, you know, it was a gigantic financial party, but I think even the people who are partaking in that party thought, oh, like, we're probably due for the economy to plateau for a little bit, to kind of flatline for a little bit, but to collapse, like, that's something different. And in hindsight, all the pieces get put together in a way that I think makes it seem more obvious than it should have. Because a lot of what created something like the Great Depression, it was not one event that really caused it. It was like the confluence of five events happening at the same time. The stock market crash, the dust bowl in the Midwest, the banking crisis that began in Europe, really bad policymaking across central banks and publishers. It was like all these confluence of factors happening at once that if even one of those things did not happen, it would have been a completely different story. I mean, if you look at the Great Depression and you subtract the banking crisis, like, let's say it was just a stock market crash and a dust bowl, it would be one paragraph in the history books today. We would not even think that much about it. The banking crisis is what turned it into a catastrophe. Or if it was just a banking crisis, but there was no stock market collapse involved in it in the 1929 crash. It would not gain, like, the public cultural appreciation that we have for it today. Because the stories about, you know, stockbrokers on Wall street jumping out of buildings is, like. It's so profound and memorable that it gives the Great Depression this like, cultural moment, I think so all of those things, it was all these events happening at once that were made it so in hindsight, it seems like, oh, well, of course we should have seen that coming, but I don't think it was that obvious. You could say the same thing about COVID too, where in hindsight, like, we've been having pandemics for millennia, of course we're going to have more in the future. But something like Covid, it was like it was such a long list of a crazy new virus, followed by poor policy making, followed by poor decisions, followed by X, Y and Z that created this confluence of fact factors that made it as bad as it was.
- [38:18]
A
There are people who would argue back then we didn't gather data, particularly economic data, as well as we do today. So into that theme of same as same as ever, there are those who would argue now it's different because we gather more data, we have more intelligent algorithms, more computers that can look for patterns and trends and models. You know, there are more eyes on it. There are also more individual investors generally who are in the market, so more people are paying attention. What would you say to an argument like that?
- [38:52]
B
The answer to that is we are much better at predicting the economy than we used to be, except for the surprises, which tend to be all that matter. Like imagine you are a PhD economist in late 2019, and you, as you just said, you have all this information at your fingertips and all these astute formulas and models and computing power to gauge where the economy's going. Well, the only variable that mattered by an order of magnitude was this virus that at that point was spreading around China that was going to send the economy into the biggest economic crisis in 100 years. That's the only variable that mattered. So you're looking at all, we have all this information and variables for things that frankly, in hindsight tend to not matter that much, whereas in the last 20 years, really, the only economic variables that have made that much of a difference were 9, 11 Lehman Brothers collapsing in Covid. That's it. And those variables, I think are still and always will be impossible to predict, no matter how much data or computing power the economists have.
- [39:53]
A
How do we distinguish between misfortune and recklessness?
- [39:59]
B
It's, it's, in hindsight, it's, it's almost impossible. And I've used examples in the past of somebody like John D. Rockefeller, who there was several times in his career where he would be dragged into court and people at the courts would say he is no different than a Common criminal. And the ways that he was treating competition and whatnot today, in today's economy would never be allowed. And then so you could, you can imagine in alternative history in which Rockefeller back in the 1800s, early 1900s was held accountable and thrown in prison. And you can imagine in an alternative history where we view him today as like the Bernie Madoff of his day. Same with Cornelius Vanderbilt. All those guys, the part of the reason that they were so successful, someone like Vanderbilt is because the rules and laws that his competition were following. Vanderbilt just said, to hell with it, I'm going to do it my own way. And that's why he was so successful. So when you look back at hindsight, was he bold or was he reckless? Well, when, when there was a paper thin line between him becoming the richest man in the world and thrown in jail, I think you have to say it was, it was reckless. But it's so, it's impossible to think that when all we know about him today is Rockefeller and Vanderbilt were the richest men in the world, like absolute dominating their career, the smartest businessmen who ever lived. But there was this alternative history which they could have been so, so different. And I think you can say the same today about Steve Jobs, Mark Zuckerberg, all of these people have made decisions that worked for them, worked incredibly well. But there is this alternative history in which it would have been completely different. So I use the example of Zuckerberg, where in 2006, when Zuckerberg was like 21 years old, Yahoo offered him a billion dollars cash for Facebook and he turned it down. Of course, at the time, I think a lot of people said he's crazy. Like a billion dollars cash. You're 21 years old for this little 2 year old startup. But in hindsight, we look back at him and he's like, he was genius for turning it down. He saw the future. But there's so many alternative worlds because at that same moment Microsoft offered yahoo, I think $50 billion to buy Yahoo. Yahoo turned it down, of course. And now we look back at him and we're like, you idiots, you should have sold to Microsoft for $50 billion. So is there's all these alternative histories where this gets back to what you and I were discussing earlier about probability and whatnot. Everyone views it as black and white. Were you right or were you wrong? But I think the only way to really gauge a decision is were the odds in your favor. And there's a really interesting thing with Sam Bankman Fried, who was of course recently found guilty, was A fraudster and whatnot. His view, and I'm sure I'm oversimplifying this, but his view on risk that he has articulated. He said if there was a 51% chance that humanity could become twice, twice as better off or a 49% chance that humanity would be wiped out, he would take that bet every single time because the odds are in your favor. There's a 51% chance of everyone getting better or 49% chance of us all dying. He said he would take that bet every single time. And I think this is why he's in jail now. It's such a flawed view of risk to understand that if the downsides are catastrophic, there's almost no amount of upside that's worth it. And everyone understands Russian roulette. Even if the odds of living are in your favor, you know, there's one bullet in six chambers, the odds are in your favor, you would never take that bet. And I think that is that a lot of this when we look back at these bold and reckless decisions, the only way to gauge it is like, were the odds in your favor and were the consequences of it not going in your favor catastrophic? And I think for people like Rockefeller and Vanderbilt, the answer was yes. The odds of it not going in their favor was they would have been ended up in jail, but they still did it anyways. And because it worked out, we think of them as, I think, smarter and more heroic than they actually were.
- [43:46]
A
That goes back to our earlier conversation about risk of ruin. Right. If humanity being wiped out is the ultimate risk of ruining. That seems to tie well with the notion that some of the people that we hail as geniuses like Isaac Newton or Elon Musk are. I mean, their ideas are a little kind of bat Elon. I mean, he's trying to innovate in electric cars while also creating the boring company and neuralink and the hyperloop and trying to make the human species multi planetary and terraform. Mars. Who does that? Who does even one of those things?
- [44:25]
B
There's this great quote from Kanye west where he said, if you guys want crazy music, there's a chance it's going to come from a crazy person. And that has a different meaning now because I think he has been diagnosed as actually mentally ill. So it's a very different meaning. But I think in a broad sense he's right that if we want a really crazy innovative company from Elon Musk, where he's going to take on electric cars and try to go to Mars and all these things it's going to come from a person who by definition is not well balanced. And then, and therefore we should not be surprised when Elon Musk exhibits behavior that we don't like or that some people don't like. Because of course, like, by definition, of course he is unbalanced. He's trying to go to Mars right now, you guys. Of course he's not an ordinary thinker. And there's this really interesting point from John Maynard Keynes, the great economist. He back this is about 100 years ago, he bought a bunch of papers from Isaac Newton. They were just part of Isaac Newton's personal library, his like his notes and his diaries. He bought a trunk of these papers and Keynes wrote that he was astounded to learn after going through these papers that Newton spent a big part of his life trying to do alchemy, trying to turn base metals into gold, trying to like, how can I turn copper into gold? And Newton like devoted a huge part of his life towards effectively sorcery. And, and now I think you can look back at that and say, was Newton, who of course like invented calculus, he's probably the smartest human who ever existed. Was he that smart in spite of his craziness trying to discover alchemy? Or was his willingness to try to do alchemy indicative of his ability to think outside of the box and that was why he was able to invent calculus and be so, so genius? I don't think we have an answer. I think those two are one in the same. I think people who are as genius and non conforming as Newton and Musk and other people are by definition are going to partake in behaviors that to the rest of us look crazy. And I don't think you're ever going to have, you're ever going to separate that. I've always said I think the CEO who comes the closest to being a crazy out of the box thinker while looking and sounding and dressing like an ordinary CEO is probably Bill Gates. He's thinking 10 standard deviations away from everybody else. But he is he most of the time at least says the right things, dresses the right way says as an ordinary CEO would. But that's very, very rare. I think way more common. When you find a crazy genius like this, it's someone like Steve Jobs who said whatever he wanted to say whenever he wanted to say it, or Elon Musk, of course we all know his behavior. So I think understanding that those things are part of the same package and you cannot separate the good crazy that you enjoy from the bad crazy that you wince at. You cannot separate those two. It's part of the same package. This episode is brought to you by Lifelock.
- [47:22]
A
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B
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- [48:12]
A
40% off sitewide plus a free professional measure. Rules and restrictions may apply. Each person who is listening to this probably has their own. Probably not to the extent of somebody like, like an Elon Musk or a Bill Gates, but each person listening to this has their own ways in which they are creative and they innovate and they don't conform and, and then they also have their responsibilities to be a good citizen. How for each person listening do you balance that desire to be creative and push the boundaries and perhaps embrace a little bit of recklessness, but, you know, while also maintaining your standing as a, as a good family member and a good citizen?
- [49:07]
B
Well, I'll tell you what it's been for me. I mean, this is the kind of the core of my first book, the Psychology of Money was the reason I want to get rich is to be independent. I don't want to get rich so I can have a yacht and a Ferrari. I want to get rich so I can wake up every morning and say I can do whatever I want today without anyone, you know, holding me back or telling me what to think and how to think and when to think. I just want to be my own person. And I think that if you can use your desire for wealth to gain that, it's enormous. Now, my independence does not mean going to Mars and saying crazy things online, I hope, but my independence means I can think for myself and I can do things that I want to do with my family rather than conforming to the whims and wishes of some senior vice president sitting in an office somewhere. So that's, I think that's been a lot of it for me. And I do think that, I mean, obviously the people like Musk and Newton, whatnot are, are the, the one in a billion kind of thinkers. But I, of Course, I think once you are independent, then you can really think for yourself and do things and say things that you want to say. But of course, I, at least I hope that I can also balance that with being a good husband, a good citizen, a good friend, a good father, et cetera, et cetera. So I do think like, for most people that balance is going to come natural because my, my natural balance does not include going on Twitter and offending hundreds of millions of people. That's. That, that's not part of me. So maybe it's just this idea that money just reveals who you are. It doesn't make you different, it just reveals who you are. And, and I think it's actually really telling. When you see people who gain enough money to be able to say whatever they want and do whatever they want, then the, the mask comes off and that's who really are. And sometimes it's an am sweet person who is revealed underneath, and sometimes it's.
- [50:55]
A
Not right, and sometimes it's a, a nuanced and contradictory balance between the two.
- [51:02]
B
The other thing is, I've often thought that people who are abnormally good at one thing tend to be abnormally bad at another thing. Like this is not like a law of physics. I'm sure there are, I'm sure that's, it's just like a casual observation, but it's almost like your mind only has enough bandwidth for a certain amount of, of activity. And if you are devoting all of your mental bandwidth to one topic, regardless of what that topic is, it's going to come at the expense of other things. And this is actually something that you do see across. Like very successful entrepreneurs who devote their entire life to one thing, they become very, very good at that one thing, regardless of what it is. But it usually, it comes at the expense of their personal life, their family, their ability to be a good parent, their friends, their own mental health, their own physical health. Like being abnormally good at one thing is pulling you away from being, you know, having a more balanced life. But then when you state it like that, it's like, of course, of course Elon Musk does not have a well balanced life. That's why he's successful. Of course, Jeff Bezos doesn't have a well balanced life. That's why he's successful. Like a lot of it is just recognizing the cost of success. And for ordinary people looking up to these people, if you are not, you know, really keenly aware of that cost of success, then you're getting like a false sense of who your heroes are. And so realizing that, particularly if you're a young person and you're like, I want my career to be like that guy. I want to make as much money as. As. As she does, not understanding the cost of what it took them to get there very often, which is the cost of your family life. I think once you take account of those costs, people's desire to be like that other person will significantly diminish.
- [52:41]
A
Right. Take in the entire picture and not just cherry pick elements of a person's life. You say that stability is destabilizing. On the topic of crazy geniuses, stability for society, stable times lead to instability. Can you elaborate on that?
- [53:03]
B
I think at the highest level, stability creates optimism. Optimism creates complacency, and complacency creates destabilization. And as we put all that together, good times plant the seeds for bad times. And you think about in the economy, when the economy is very strong, people get optimistic about their own lives, about their own prospects. When they become optimistic about their own prospects, they go into debt, because that's the reasonable thing to do if you're very bullish on yourself. When they go into debt across society, the economy becomes unstable. And when it's unstable, you eventually have a recession. So a strong economy actually plants the seeds. It causes the weak economy. It's just pointing out how cyclical everything is. And I think you could say this about COVID as well, where we, as in public health, became so good at preventing and managing pandemics that we went almost 100 years without a very significant pandemic in the United States. And because of that, when one occurred with COVID we had no idea how to deal with it. We didn't have the muscle memory that we would have 100 years ago to understand how bad this could get, to spread the message for ordinary people to understand how bad it was. And I think that was explicitly caused by the fact that we became so good at preventing pandemics that it was almost a guarantee, at least in hindsight, that we were going to have a really bad one. And there are so many examples of this in nature, in economies, in people's lives, where the reason a bad thing happened is because things were so good before. And vice versa, like recessions, plant the seeds of their own recovery because people get really motivated to solve problems, valuations get cheaper, like there's more opportunities. And that plants the seeds of the boom. And you could say that about pandemics as well. Like after Covid, we are more prepared and more aware of pandemics today than we were three years ago. So it goes in both directions in this type of, this like natural cyclicality.
- [54:57]
A
What happens when there is a disconnect between the, the data and the anecdote. So, for example, right now we, when you look at economic indicators, right, GDP is high currently, third quarter of 2023, it was 4.9%. That was the highest it's been in two years since 2021. Unemployment historically quite low. We've got really good economic data and yet there's still a lot of negativity, a lot of fear. Many people are worried about getting la the fact that we have such low unemployment. What happens when, when the data is stable but the emotions are unstable or instable.
- [55:38]
B
When I, when I think about that, this topic at first, it's kind of, it's kind of sad and tragic that it's, it's not unlikely that we will look back at, you know, the economy of 2022 and 23 as about as good as it can get. Unemployment, you know, near 3%, stock market doing really well. You can earn five and a half percent on your cash productivity going well. Like things are, the aggregate level are not bad. And if, if even in that situation you have the amount of doom and gloom that we have among you, look at like consumer confidence, it's kind of tragic because it's like, are we ever going to be happy? It's like the Louis CK skit. Everything's amazing and nobody's happy. So there's that part of it. There's also this idea that like GDP is an aggregate figure. It's not explaining any one person's situation. And unemployment is an average figure. It's not explaining everyone's life. The CPI, like inflation, that is describing the household spending habits of a typical average ordinary American family, which means that there are hundreds of millions of other people for whom that does not apply to because they spend their money differently and whatnot. So I think part of what's going on here is on average or in aggregate, things are going well. But there are tens of millions of households who have legitimate gripes about how things are going. Because in their industry, in their household, in their town, given their spending patterns, things are not good right now. And even if, you know, for other people, things are really good. So one example of this is in 2020, if you owned a laundromat or a restaurant in 2020, it was, it was worse than the Great Depression for you. Like business went to zero. But if you worked in tech in 2020. It was the best year you've ever had. You made more money, had more job security in that year than you've ever had in your life. And because of that, I think you have half the country that just does not understand the economic views of the other half in a more stark way than has ever existed. And because I think that's part of why you have the disconnect between, on one hand, the economy looks really strong, and on the other hand, you have a lot of people who are really pissed off and scared right now. I think it's a lot of it is just because we have such vastly different experiences in the economy right now.
- [57:50]
A
Aggregate data, is that that middle of the K? Right.
- [57:54]
B
Right.
- [57:55]
A
Well, we're coming to the end of our time. Are there any final takeaways that you would like to leave for this audience?
- [58:03]
B
I think a core of both of my books is kind of, if there is a common denominator, it's A, a plea for humility and B, a plea to become more introspective about what you personally want out of life and realizing that what, what society tells you to want, what your friends tell you to want, even what might be intuitive that you should want, is not always necessarily what you want. And everyone's views of what they aspire to are very different. I mean, just like your taste in music is very different. And if you like rock and I like pop, it doesn't mean one of us is wrong. It's just we have different tastes. People's tastes in a lot of things in life for how they spend their money, invest their money, are going to be very different. So you have to go out of your way to figure out what you want for yourself and take a more individualistic approach to it.
- [58:48]
A
Perfect. Well, thank you so much, Morgan. Where can people find you if they'd like to learn more?
- [58:52]
B
My books, Psychology of Money and Same As Ever, are available. You know, I think everything's Amazon these days. That's more or less true. And then I spend a lot of my time on Twitter. My handle is Morgan Housel my first and last name.
- [59:05]
A
Thank you. Morgan, what are three key takeaways that we got from this discussion? Key takeaway number one, the best product, best idea, best answer doesn't win. The best story does. People pay attention to stories. How does that apply in your life? Well, perhaps you want to start some type of a side business, but you think that you don't have any new or novel ideas. You think that everything that you might want to do has been done before. There's a lot of competition. What would make you stand out? Morgan Housel shares why that's the wrong perspective and what actually matters. How you can stand out. If you are starting something new and you want to make your side hustle, your side business a success, the best story wins.
- [59:53]
B
Not the right answer. Not the best answer, not the accurate answer. In almost every endeavor in life, the best story wins. The people who catch your attention and are willing to follow you and gain your wallet, share whatever it might be, are just the people who tell the most compelling story. It's true for businesses, it's true for products. It's true for pundits. It's true for authors. I profile several authors in the Story of authors who have written books that explained zero new information. They're covering topics that are as well trotted as anything that's ever been written about before. But they sold tens of millions of books because they told a very good story about what they were doing. And that is, I think, analogous for a lot of what everyday ordinary people can be. You don't need to create a new product or discover something new to change the world or to build a good business. There is so much low hanging fruit of taking facts and products that other people have already discovered or invented and just telling a better story around them.
- [60:51]
A
That is the first key takeaway. Key takeaway number two. We know that comparison is the thief of joy, but Morgan Housel explains how growing wealth inequality and the advent of social media is making the comparison trap harder and harder to avoid. And he shares the reminder that what we see in another's highlight reel is not the whole picture.
- [61:14]
B
Everything is just relative to those around you. So whenever you are gauging how well you're doing financially, you just say what do I have compared to that person? Compared to your neighbor or your co worker or your siblings? Everything's relative to those around you. And in the 50s, because there was very little wealth inequality, most people looked at those around them and said, relative to that person, I'm doing pretty well. I'm doing at least as well as them. There are not that many people who I see in my town who are doing dramatically better than I am. And I think what has happened in the 80 years since then is our incomes have have doubled in real terms and our houses have gotten bigger and our life expectancies have gotten longer. And like, go on down the list of things that have improved, but our expectations have grown by even more because now there is a subset of society who we can look at who are no matter how well you're doing, even if you are a brain surgeon living in Beverly Hills, you are surrounded by people who are doing so much better than you. Then to make matters worse, now with social media you have like the fake view of how well people are doing because everyone's just posting the curated highlight reel of their life that makes themselves look happier and prettier and richer than they probably actually are.
- [62:25]
A
That is the second key takeaway. Finally, key takeaway number three. A huge part of our well being is tied to the quality of our relationships. Successful relationships hinge on understanding one another. In the third and final key takeaway, Morgan Housel talks about how to develop a deeper understanding of those with whom we interact.
- [62:47]
B
Everyone is viewing the world through their own lens, through the lens of their own incentives, through the lens of all these kind of like social aspirations and different time horizons, different risk tolerances that completely changes how people are going to behave in the world. And I think a lot of what happens in the world when you see people doing things that you disagree with, like different investing behavior that you think, why could people possibly be buying these crypto coins? Or in geopolitics, how could people possibly believe X, Y and Z about that candidate or take these actions in that war, whatever it would be? And 9 times out of 10 the the answer to that is they've experienced something that you have not. And therefore they have different goals and priorities and skills and viewpoints that you don't. And I think it's really important for a lot of things in life that whenever you see somebody doing something you disagree with, a good question to always ask yourself is what have you experienced that I have not? And if I had experienced the same thing as you, would I be partaking in the same behavior that I disagree with? And a lot of times the answer is yes. The answer is yes.
- [63:56]
A
Those are three key takeaways from this conversation with esteemed thinker and best selling author Morgan Housel. Thank you so much for tuning in. If you enjoyed today's episode, please do three things. Number one, go to affordanything.com shownotes and subscribe to our show Notes so you can get a synopsis of every episode. It's totally free. We'll see you there. Please do that. That's the number one thing. Number two, please share this episode with a friend, a family member, a colleague, a co worker, a neighbor. And number three, make sure that you are following this show in your favorite podcast. Playing at make sure that you've hit that follow button and you're downloading every new episode. Thank you so much for being part of this community. My name is Paula Pant. This is the Afford Anything podcast and I will catch you in the next episode.